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The Cracks and the Crack-Up, by Dawn Bennett

Washington, DC -- (ReleaseWire) -- 07/20/2015 --The cracks in the eurozone have been showing more and more clearly since last weekend's meeting of the Eurogroup that ended with a proposal for a third bailout for Greece, just accepted by the Greek Parliament, with austerity measures (including higher taxes, deep cuts in pensions and other government benefits and the sale of most state assets) at least as draconian as the ones rejected in a country-wide referendum on July 5th. Italy's Prime Minister, Matteo Renzi, declared that "enough is enough," and insisted that Angela Merkel of Germany find common ground for the good of the entire EU, while the Foreign Minister of Finland vowed that he would bring down the Finnish government if a bailout deal was offered. The UK and possibly other non-eurozone members of the EU are making noise that they will object strongly if money from the European Financial Stability Mechanism (EFSM), a fund backed by all 28 European Union member countries and not just the 16 countries that have adopted the euro, is used to fund the bailout. The UN has warned that some of the austerity measures may constitute human rights violations. The IMF feels that any potential deal will fail without more significant debt relief.

And we haven't even talked about the situation within Greece itself. Prime Minister Alexis Tsipras' own left-wing Syriza party continued to fragment as he scrambled for a coalition to hold the government together. On Wednesday, as debate began, peaceful protests outside the Greek Parliament building in Athens turned violent when a small group started throwing molotov cocktails and police responded with tear gas, and Wednesday night unrest continued increase in intensity and violence. Calls for a boycott of German products have spread from Greece itself, throughout the world. Young people are flooding out of the country looking for better (or any) opportunities elsewhere. And now that the austerity measures and selloffs of national assets Europe has demanded are being implemented, the situation certainly won't improve. Protests, riots, firebombs and tear gas, flight from a country where it's increasingly impossible to make a living, these will all continue.

So yes, the cracks are showing, and they're not a surprise for those that have been watching. For close to three years we have been told over and over again that the Greeks and Europe had all this under control. Quite frankly, that was a fabrication, or at least an equivocation. Unfortunately, those deceptions have resulted in a gross misallocation of both political and financial capital across Europe. Greece's Parliament eventually agreed to European demands early Thursday morning, but it just really may not matter in the end. To my mind, there are only two roads forward for the eurozone and possibly even the EU as a whole. There is the slow road, where the EU quietly crumbles away; and the fast road, which leads to a quick and disturbingly massive blowup. Either way, the consequences for global equity and currency markets are frightening to consider.

Think about this: given what we've seen from the central banks in recent years, it seems possible or even likely that the Federal Reserve and its analogues around the world will use Greece as an excuse to delay raising interest rates and maybe even print yet more paper money. After having already lived through round upon round of quantitative easing, we could easily be heading for what Ludwig von Mises, the founder of the Austrian School of economics, described as a "crack-up boom."

What is a "crack-up boom?" When governments keep printing money beyond their ability to back that currency with something with actual value (such as precious metals, for instance), this will always eventually lead to inflation, which can also be looked at as devaluation of the currency. This is true whether the government is the United States, Europe, Zimbabwe, China, or anywhere else. During the early part of the inflation cycle, it may not be obvious to most people that this is happening, but eventually, a critical mass of people realizes what's going on. In von Mise's words: "But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against 'real' goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them." Citizens begin to run in front of the government, cashing their paychecks immediately, avoiding the banks and converting the cash into real goods that have intrinsic value as barter.

To an extent, this is already happening in Greece. In a news article last week, a Greek jeweler said a customer approached him on Wednesday this past Wednesday wanting to buy a million euros worth of jewelry, and gemstones. But the chief operating officer of this jewelry company said he refused because he was more comfortable holding on to the jewels, than having fiat money in Greek banks or in any bank. He said, "I can't believe that there I was, turning away a million dollar offer. But I had to turn down this deal because it's a measure of the risk we face." What a phrase that is: a measure of the risk we face.

In the United States, we're stepping into almost the same place, because we are in an era when our own Federal Reserve uses wild economic theories to justify their actions, and have also discovered the secret of how to convince over-indebted Americans to keep borrowing and spending money that they don't have. It's time for American investors, Americans in general, to realize that the cracks are getting wider and deeper, and that we will all have to find a way to traverse these crevasses if we're going to avoid falling in.

All data sourced through Bloomberg

Securities offered through Western International Securities, Inc., Member FINRA & SIPC. Bennett Group Financial & Western International Securities, Inc. are separate and unaffiliated companies.

About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com

She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.

She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or dbennett@bennettgroupfinancial.com